Chicken industry profitability improving

WHEN it comes to making money in the chicken business, it's getting better all the time, thanks to solid retail prices and ever-improving feed costs.

Processor profitability, in fact, is now the strongest it has been since 2007, according to an analysis conducted for Feedstuffs by Baseline Economic Systems.

Returns to processors this year will likely average 9.98 cents/lb., according to the analysis, a nearly 360% improvement from last year and more than double the profitability seen in 2010. Of the past five years, processors have seen profits (on average) in all but one, but this year has presented the best opportunity to make money since profits hit nearly 11 cents/lb. in 2007 (Figure 1).

Signs that the industry is enjoying improved market conditions abound, with Sanderson Farms reporting third-quarter earnings that are $41 million higher than the same period last year and announcing last week that it will begin construction Oct. 1 on a new chicken complex in Texas. The project, which had been on hold while grain prices kept margins closer to breakeven, is expected to include a feed mill, hatchery and processing plant capable of handling 1.25 million chickens per week.

Last month, Pilgrim's Pride announced a $25 million project to build a new feed mill in Alabama and also to renovate one of the company's processing facilities in that state that handles more than 1 million birds per week.

Cargill, meanwhile, cut the ribbon on its new $250 million poultry complex in China. The integrated facility will process 65 million birds per year and has been in the works since 2009.

While expansion plans seem almost a given at this point, the pace of supply growth appears to be slowing somewhat.

The U.S. Department of Agriculture reported broiler-type eggs set for the week ending Sept. 21 at 191 million, up 1.5% from last year, a significant drop-off from the growth seen throughout July and August. Chick placements of 165 million were up 3% from the same week last year, and cumulative placements for the year are up 1%, at 6.28 billion.

USDA's latest "Poultry Outlook" revised estimates for third- and fourth-quarter production upward by 75 million lb. If the forecast holds, chicken production in the second half of the year would tally 19.2 billion lb., up 3.4% from last year. With lower grain prices and an improving domestic economy, USDA projects total 2013 production to be up 2.5% from last year.

One limiting factor could be soybean meal prices. While corn prices have dropped precipitously over the past month, soybean meal has not fallen by nearly the same magnitude.

Similarly, breast meat prices have softened considerably since spring on readily available supplies. USDA's "Cold Storage" report showed that total frozen chicken supplies as of Aug. 31 were up 1% from the previous month and up 5% from last year. While wing and quarter inventories were much heavier than might have been expected for this time of year, breast inventories were also relatively plentiful.

As the domestic economy improves, consumers appear to be willing to pay slightly more for beef steaks, perhaps keeping a lid on chicken's ability to steal market share from the relatively high-priced center-of-the-plate protein.

According to Oklahoma State University's September "Food Demand Survey," consumers were willing to pay $5.10/lb. for chicken breast last month, an increase of 4.2% from the previous edition of the monthly study. By comparison, they were willing to pay $7.15 for beef, an increase of 8.3%.

Taken a step further, the Bureau of Labor Statistics reported the average price of USDA Choice boneless sirloin last month at $6.60/lb., a price well within the bounds of what consumers said they were willing to pay. The average price for boneless chicken breast last month was nearly $3.60/lb., also well within the level the Oklahoma State economists reported in their survey.

Tracking the fluctuations between the Oklahoma State survey and the bureau's pricing data should offer some interesting insights into how consumers react to changes in meat prices.

Market recap

Chicken prices were somewhat weaker last week as supplies were plentiful relative to demand. At week's end, prices were more or less steady for wings and tenders but were softer for breast cuts, legs and quarters.

The Georgia FOB dock quoted price for the week fell 0.25 cents/lb. to $1.06. Broiler prices were still considerably higher than the 95.75 cents marked for the same week in 2012. National composite weighted average chicken prices climbed steadily through much of September.

In its monthly "Poultry Slaughter" report, USDA reported a total ready-to-cook weight of 3.295 billion lb. for August, down 1% from the same month last year. Slaughter weights in July averaged 5.9 lb. per bird, up 2% from last year.

The week's ready-to-cook volume through last Thursday was 25.755 million lb., up more than 3% from the same week in 2012.

Turkey processors, meanwhile, continue to face stiff headwinds in trying to turn a profit. Producers will likely lose even more money this year than last year, marking a second consecutive year of losses (Figure 2).

Prices were steady last week, ranging from 97 cents to $1.07 on a whole, frozen, basted-equivalent basis. Fresh trading for November was marked at $1.19-1.32 FOB last week.

Turkey production totaled 484.9 million lb. of ready-to-cook product in August, down 6% from July and off 9% from August 2012. Even with fewer pounds produced, however, supplies are still plentiful, with frozen inventories up 6% from last year, according to the monthly USDA storage estimate.

Accumulated turkey ready-to-cook volume through last Thursday was running 1.4% lower than the same period in 2012.

For the week ending Sept. 22, USDA reported a total shell egg inventory that was up 4.5% from the prior week, with larger grade tallies running 6-10% above the previous week.

August egg production totaled 8.04 billion, up 3% from last year. USDA's monthly "Chickens & Eggs" report showed 346 million layers in the U.S. flock, also up 3% from last year, with that flock producing a somewhat smaller 3,233 eggs per hen.

Breaking down the layer inventory as of Sept. 1, 292 million layers were producing table or market-type eggs, 51.8 million were producing broiler-type hatching eggs and 3.18 million were producing egg-type hatching eggs.